Descartes Systems Group Inc.

Decent Increase in Revenue and EBITDA: Descartes Systems Group Inc. (TSX: DSG) provides a software solution that allows users in the shipping industry to communicate with one another. As on 28 May 2020, the market capitalization of the company stood at CAD5.26 billion.

Quarterly Performance (For the Period Ended 30 April 2020): The company has recently released its results for the first quarter ended 30 April 2020, wherein it reported an increase of 7% in revenue to USD83.7 million and a growth of 15% in adjusted EBITDA to USD33.0 million. In the same time span, cash provided by operating activities stood at USD27.5 million, up by 18% from USD23.4 million in Q1FY20 and up by 4% from USD26.4 million in Q4FY20. During the quarter, the company generated USD15.7 million from its operations, reflecting an increase of 32% on Q1FY20 and reported an increase of 51% in net income to USD11.0 million. This resulted in a growth of 44% in earnings per share on a diluted basis to USD0.13, up from USD0.09 in Q1FY20.  

Quarterly Financial Highlights (Source: Company Reports)

innoAviation Helps Air Carriers by Using Descartes’ ULD Tracking Solution: The leading unit load device leasing and services provider, innoAviation Limited, is using the Descartes CORE™ ULD Tracking solution to help air carriers track critical COVID-19–related personal protective equipment shipments. The company has also announced that it has acquired all the shares of Peoplevox Limited for a consideration of USD24.1 million.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months,

Stock Recommendation: Despite the rapid swings in global demand due to the worldwide pandemic, the company is in a strong position to deliver superior results for its customers and other stakeholders. DSG has also undertaken a restructuring plan to reduce its costs base, which will further strengthen the financial position of the company. As per TSX, the stock of DSG is inclined towards its 52-weeks’ high levels, but still holds the potential for growth. The stock gave a return of 12.27% in the past three months and a return of 12.58% in the last one month. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation and have arrived at a target upside of higher single-digit (in percentage terms). For the said purposes, we have considered, Manhattan Associates Inc, Kinaxis Inc, Altus Group Ltd (Ontario) etc. as peers. Considering the resilient financial position, current trading levels, attractive returns in the past one month, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 65.64 on 29 May 2020.

DSG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Computer Modelling Group Ltd

Impressive Results and Resilient Business Model: Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. As on 28 May 2020, the market capitalization of the company stood at CAD353.09 million.

Annual Performance (For the Period Ended 31 March 2020):  Despite the headwinds in software license revenue in the fourth quarter, the company reported a slight increase of 1% in total revenue to CAD75.78 million and a growth of 15% in EBITDA to CAD36.11 million in FY20. This was supported by an increase in professional services revenue with consistent revenues in the software license. The company exited FY20 with a 7% increase in operating profit to CAD31.75 million, a 4% increase in basic earnings per share to CAD0.29, and a 6% increase in free cash flow per share to CAD0.33. These impressive results reflect the strength of the company’s business model. The company closed the year with cash balance of CAD40.5 million and no debt, demonstrating solid liquidity. The decent financial performance of the company enabled the Board to declare a dividend of CAD0.05 per share.

FY20 Financial Highlights (Source: Company Reports)

Impact of COVID-19: The global COVID-19 pandemic led to declines in demand for oil and gas, which, combined with producer market share competition led to volatility in commodity prices. CMG has taken certain measures to preserve liquidity, manage costs, and protect shareholder value. However, the company is well-positioned to maintain its productivity and have received a positive response from its customers.

Growth Catalysts: The company is well-positioned with a strong team and fiscal prudence to deal with uncertain times posed by COVID-19. The company is maintaining the financial and operational discipline to benefit from future opportunities.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is likely to employ new and innovative technologies to reinforce its position as a leading developer and supplier of reservoir simulation software in the world. Despite the uncertainties, CMG is well-suited foster business growth opportunities. As per TSX, the stock of CMG is trading close to its 52-weeks’ low level of CAD3.43, proffering a decent opportunity for the investors to enter the market. We have valued the stock using EV/EBITDA multiple based valuation approach and have arrived at target price, offering an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, business resilience amidst the global pandemic, and impressive full-year results, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 4.6, on 29 May 2020.

CMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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